Record Emerging Markets suffers worst ever outflow in June 2013


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Worst ever??  Really???   I've been in emerging markets ( EEM , quote )  for 17 years and thought I had seen the worst of fund flows during a handful of market routs that combined global macro fears, deteriorating local fundamentals, and extreme positioning.

June 2013 set the bar higher (or lower depending on how you see it) for emerging markets equity outflows turning in the worst month on record.

Through Wednesday $19.8 billion left emerging markets equity funds surpassing the previous high of $18.7 billion set back in Jan 2008.

I've commented on Fast Money, written, and tweeted for 2 weeks that I have been amazed at the broad based bashing of emerging markets and negativity coming from market pundits who frankly have never truly traded or invested in emerging markets.

The death calls have been building with WSJ, and FT adding full page articles well after the horse has left the barn to stir the marginal investor.

As my experience in emerging markets has proven, this is usually when it starts to get interesting to buy.

Monday, China was the catalyst to the capitulation as hawkish headlines from the PBoC triggered investor fears of "China's house of cards" while Fed fears had the world in panic.

Add in rioting in Rio and trouble in Turkey and...Well, you get it.  Here are the numbers for the week ending June 26 th : Emerging Markets Equity Funds Reported outflows of $5.62 billion withe following breakdown:

EM Asia Equity Funds = (-$ 1.20 bn)

EMEA Equity Funds =  (-$ 0.53 bn )

GEMs Equity Funds =  (-$ 3.74 bn)

LatAM Equity Funds = (-$ 0.15 bn)

*all funds stated in U.S. dollar terms

June's record outflow also reversed the entire 2013 year to date inflows of $18.1 billion in one shot.  Emerging markets debt was no better coming in with their largest outflow week ever of $5.57 billion.  In my view emerging markets debt was a major culprit to the equity market move as well.

The pressure on emerging markets credit and currencies in the last month has been enormous.  Think about it, you have the double edged coiled spring of rates and credit spreads at all-time lows, and then you inject an 80bp move wider in the U.S. 10 years with a run on emerging market currencies as carry trades are unwound.

Emerging markets debt was the most crowded trade in the world over the last 5 years as hunt for yield led investors to places they couldn't pronounce to get positive carry.

We may still be in the early to middle stages of the credit move as the pressure of higher rates is often self-fulfilling to credit.  Emerging markets debt guys often turn to the equity market to hedge their large exposures when the macro gets dicey.  Without the same CDS market as the one that existed pre-crisis, equity indices and country ETFs have become common hedging tools for non-dedicated equity players.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
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